Mark makes his point about the dangers of overfunding a startup with too much outside investment. He says:
Over funding often produces bad behavior in early-stage companies. You hire people too fast, you over build your products, you try to force market adoption and you do PR blitzes before your product is really ready for prime time. And having too much money certainly raises board expectations that you will do big things quickly. No board is going to give you $25 million up front and then expect your year-one staff expenditures to be $2 million.
And that’s great; well said. But I think the underlying problem applies to a lot of other areas in a business. Having three developers doesn’t mean the software project will be done three times faster. A lot of things take time, and time doesn’t divide into meaningful units like bricks.
This morning I added Mark Suster’s Both Sides of the Table to my blogroll here because his post Invest in Lines, not Dots reminded me that I’ve been meaning to include his blog for a long time. His idea here is something everybody should understand.
His single line chart here,combined with his title, makes the point extremely well. As a startup looking for investment, you need time to become a line. You start as a dot:
The first time I meet you, you are a single data point. A dot. I have no reference point from which to judge whether you were higher on the y-axis 3 months ago or lower. Because I have no observation points from the past, I have no sense for where you will be in the future. Thus, it is very hard to make a commitment to fund you.
So instead of that, Mark suggests, you need time to communicate progress:
For this reason I tell entrepreneurs the following: Meet your potential investors early. Tell them you’re not raising money yet but that you will be in the next 6 months or so … Hopefully by then you’ve made good progress. You’ll be able to give them an update on key hires, pilot customers, key tech innovations – whatever. Keep these interactions low-key and short.
Do you see the dots vs. lines concept in that? I think it’s one of those great concepts that seems obvious, but only after you’ve heard it. I also really like Mark’s emphasis on entrepreneurs and investment as a long-term relationship. Here’s his conclusion for entrepreneurs:
you might be pumped up with that super quick round done at a high price. But just remember that raising money is a bit like Ireland in the 90′s – no divorces allowed. I know VCs and sophisticated angels can be difficult, slow and price sensitive, but I also know that in tough times unsophisticated investors can be a right pain in the arse. For some companies – they become deal breakers on further funding rounds. By definition if somebody is investing in you as a dot (limited thought, limited due diligence, maximum price) they are a dot to you, too. You can’t really know them in 2 minutes yet you’re letting them own part of your business.
That’s an excellent post. Go read the original. He has several additional line charts, and great advice.